Got a Diwali gift from your employer? Check the tax rules

Awaiting your Diwali gift from your employer, or have you already received one? Before celebrating, make sure you understand the tax implications. While gifts from employers can be tax-free up to a specified limit, bonuses are taxable from the very first rupee. The distinction could make a significant difference to your tax liability.

The Income-tax Act, 2025, which came into effect on 1 April 2026 and replaced the Income-tax Act, 1961, has raised the annual tax-exempt limit for gifts received from employers to less than ₹15,000, from less than ₹5,000 earlier.

"The exemption applies from tax year 2026-27 (FY27). The gift exemption limit of ₹15,000 covers non-cash gifts, vouchers and tokens, including physical gifts and digital gift cards redeemable for goods or services, provided their aggregate value is below ₹15,000 during the tax year. Gifts to a member of the employee's household are also covered," said SR Patnaik, Partner (head-taxation), Cyril Amarchand Mangaldas.

If the total value of gifts reaches ₹15,000 or exceeds it, the entire amount becomes taxable. "Rule 15 of the Income-tax Rules, 2026 states that when the aggregate value of all gifts in a tax year is less than ₹15,000, only then the value of such gifts shall be considered as 'nil'. Hence, conservatively, the entire aggregate value of all gifts may become taxable as a part of salary in the hands of the employees," Patnaik said.

For instance, if your employer gives you a mobile phone worth ₹10,000 during Diwali and you receive another gift worth ₹4,000 later in the same tax year, the aggregate value of ₹14,000 remains tax-free. But if the total value reaches or crosses ₹15,000, the entire amount becomes taxable.

Gift or bonus?

Not every payment received during Diwali qualifies as a gift. Cash payments, including Diwali bonuses, are generally treated as salary and taxed accordingly.

"Even cash gifts will fall under this limit as long as the same is gratuitous from employer. If it comes as Diwali or professional bonus, it will not fall under the ₹15,000 limit and will be 100% taxable as salary from the first rupee," Patnaik said.

The tax treatment also determines whether the employer needs to deduct tax at source (TDS). Employers do not have to deduct TDS if the aggregate value of gifts is below ₹15,000. TDS is required when the value exceeds ₹15,000.

"Gifts more than ₹15,000 would be taxable in the hands of the employee and would be considered as part of their salary when received from the employer whether in kind or in cash. The employer is required to deduct TDS on such gifts which is usually adjusted from the regular monthly salary of the employee. The employee can verify that the gift amount has been considered in his income in Form 130 (previously Form 16) and the employer has deducted tax accordingly on it," said Ankit Jain, Partner, Ved Jain and Associates.

Form 16 has been replaced and renumbered as Form 130 from 1 April 2026, for tax year 2026-27 onwards.

The rebate trap

While employees receiving non-cash gifts within the exemption limit need not worry about an additional tax liability, those receiving cash bonuses should assess how the payment affects their overall taxable income.

This is particularly relevant for salaried individuals earning close to ₹12.75 lakh annually under the new tax regime. Under Section 87A, resident individual taxpayers with taxable income of up to ₹12 lakh can claim a rebate, effectively bringing their tax liability to nil. For salaried employees, the ₹75,000 standard deduction takes the corresponding gross salary threshold to ₹12.75 lakh, assuming they have no other income.

Consider an employee earning an annual salary of ₹12.60 lakh. After the standard deduction of ₹75,000, the taxable income works out to ₹11.85 lakh, keeping it within the ₹12 lakh rebate limit.

Now, if the employee receives a Diwali bonus of ₹50,000, gross salary rises to ₹13.10 lakh and taxable income to ₹12.35 lakh. The employee will no longer qualify for the full Section 87A rebate and will have a tax liability. Including health and education cess, the tax would amount to ₹36,400. This effectively reduces the bonus of ₹50,000 to ₹13,600 after tax.

Therefore, while a Diwali bonus may appear to offer an additional financial cushion, employees earning close to the tax-free income threshold should account for the additional tax it could trigger. Unlike an eligible gift, a bonus can push their income beyond the rebate threshold and increase their tax outgo.